Yields in free fall cheer Sri Lankan bond investors
Tuesday, 24 December 2013 00:01
By CRISIL Research
Expectations that the Central Bank of Sri Lanka (CBSL) will cut key rates at its monetary policy review next month have increased over the past couple of weeks, if the sharp decline in the yield, or the de facto interest rate, on treasury bills (t-bill) and treasury bonds (t-bond) is any indication.
As on 18 December, the yield on the t-bill with 364 days to maturity stood at 8.53% – down 122 basis points, or 1.22 percentage point, since 20 November. On 19 December, the yields eased by a further 20-30 basis points.
Yields, or the interest rates, on t-bills and their prices are inversely related. When interest rates fall, the value of a t-bills portfolio rises, benefiting investors.
In Sri Lanka, T-bills are issued by the CBSL on a weekly basis.
Yields on t-bonds, too, have fallen around 160 basis points over the same period.
The easing is partly attributed to the moderation in inflation, as measured by the Colombo Consumers’ Price Index which declined to 5.6% on-year in November from 6.7% in October – the lowest level recorded since April 2012.
The NDBIB-CRISIL indices, which track the performance of Government securities in Sri Lanka and are believed to be sentiment indicators, show that the market has given attractive returns in the last one month due to the considerable easing in interest rates.
The NDBIB-CRISIL 91-Day T-Bill index and the NDBIB-CRISIL 364-Day T-Bill index have given point-to-point returns of 0.76% and 2.04%, respectively, during the previous one month.
Similarly, the NDBIB-CRISIL 3-Year T-Bond index and the NDBIB-CRISIL 5-Year T-Bond index have given point-to-point returns of 5.07% and 5.96%, respectively.
The sharp rise in the index values over the one-month period (see table) indicates that the market has been factoring in the lowering of cut-off yields in the t-bills auction and possibly a cut in key rates by the CBSL when it reviews the monetary policy next month in January 2014.
In its last monetary policy review, on 9 December, the CBSL had kept the key rates unchanged.